25/11/2010
It’s the decade of black holes!
Another black hole was discovered in LIC a couple of days back after one was discovered in Employees Pension Fund scheme, 1995.
It was admitted by officials of LIC that 3 of its guaranteed returns schemes were facing a shortfall of about Rs. 14000 CRORES. These schemes –assures a guaranteed return of 12%---were launched in the hey days of high interest rate regimes.
However, with interest rates plummeting to single digits, the gap --between what the assets of the schemes expected to realize at maturity and what they actually realize-- is a big one and growing daily. Every fall in the interest rates will only widen this gap.
Rather than take corrective measures (which are extremely remotely possible) LIC has like the CWG officials keeps chanting aal is well. The reasoning it has put forth is unexpected from an organization of the likes of LIC. It has said that:-
- The losses are notional; and
- The losses will be made good by surplus of some other plans.
It is rather strange that even the financial crisis of 2008 has not taught any lessons to the LIC top brass or our watch dogs when they dismiss the so called “notional losses” as not so important! Why don’t they ignore the gains of other schemes in the same manner as they are also notional? That notional gains should be enjoyed as the EPF board trustees showed us when they declared a higher interest rate of 9.50% --just because they discovered Rs.1700 odd crores of notional gains tucked away somewhere in their books.
The existence of this gap—albeit notional at present—is not something to be wished away. It is like a time bomb ticking away….it is only a matter of time before it explodes.
A gap between the realizable returns and guaranteed returns is very much real and will in all likelihood expected to grow at an exponential rate. The simple reason being that fixed income returns in
The gap will most likely be around 3% if not more. With the schemes having still got a few decades to run, this 3% gap will grow to about 80% in nearly 20 years. However, a lic policy holder need not worry as long as they have the following support base:-
- Holders of those policies which are in surplus (so what if you have to subsidize the loss making policy with your surplus)
- Government of
No matter how much LIC mis-manages its investments or policies, at the end of the day it can always run to its big daddy—Government of India—for a bail out. And the best way for the government to make good its losses---impose a cess/tax. Taxpayers are meant to be milked!
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